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JOINT COMMITTEE ON COMMUNICATIONS, MARINE AND NATURAL RESOURCES debate -
Wednesday, 7 Apr 2004

Commission for Energy Regulation: Presentation.

I welcome Mr. Tom Reeves, commissioner, and officials of the Commission for Energy Regulation. Mr. Reeves has kindly sent the committee a copy of his presentation which has given members a chance to assess it. I ask Mr. Reeves not to read his presentation verbatim. We are anxious that he should provide the committee with bullet points to allow members to proceed to questioning quickly. Before I ask Mr. Reeves to begin, perhaps he will introduce his officials.

Mr. Tom Reeves

I thank the Acting Chairman for providing us with the opportunity to meet the committee. With me are Mr. Eugene Coughlan, head of generation, renewables and environmental affairs, Dr. Paul McGowan, head of gas and Ms Cathy Mannion, head of electricity markets. I convey the apologies of our head of networks, Mr. Denis Cagney, who had previously arranged a holiday and is abroad.

I want to draw everyone's attention to the fact that while members of the joint committee have absolute privilege, the same privilege does not apply to witnesses appearing before it. While it is generally accepted that witnesses have qualified privilege, the joint committee cannot guarantee any level of privilege to witnesses. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses of the Oireachtas or an official by name or in such a way as to make him or her identifiable.

Mr. Reeves

I will first consider electricity before turning to gas. In considering which issues to touch on, we tried to extract those we regarded as most important.

I draw the attention of the committee to the fact that the market for electricity has been open for a number of years and is due to open fully in 2005. The market is currently 56% open and will be fully open by February 2005. There has been much success with people moving to new suppliers which is something we are quite pleased by. It is important for us to ensure the facilities are in place to allow people to make up their minds about what suppliers they want. We also must ensure there are enough suppliers in the market. There is always a benchmark price in the market. At the moment it is the price charged by the ESB. People have said that the price has increased significantly over the past few years, which is true. That is on the back of not having increased at all for more than 12 years.

There is a great deal of catching up to do and much investment in networks and plant had to be made to ensure we had enough electricity for the winter. It will be remembered that there was speculation in the newspapers last January as to whether or not we would meet the electricity requirement peak in winter. Thankfully, we did. Despite our increases, we are still more or less at the EU average for residential customers. We are a little above average for industrial customers. The ESB tariffs have developed over an extended period and we are now reviewing the structure and nature of them to ensure we have proper, cost-reflective tariffs for all.

We have responsibility for the wholesale electricity market. It was handed to the commission when it was first established and we were charged with replacing it with a new one. As members can see from the document I submitted, we are in that process. While the new market will be quite different, it will be a useful one for Ireland. At the moment, we determine the prices in the market, whereas in future the market will determine the price itself. The new market will encourage new generators to locate in the appropriate parts of the network. It will clearly indicate where new investment is required in the network and provide for the cheapest generation at any particular time. The market will deal with environmental issues such as carbon emissions which can be incorporated into the price. It will also be possible to involve the demand side allowing customers to decide where the price has gone too high that they do not wish to purchase. That will be a novel and attractive feature of the market.

No matter what market system is in place, it is always an issue that the ESB is a large, dominant presence which remains vertically integrated. Another issue is security of supply to ensure that demand can be met at all times. Those issues will be addressed in the new market. We are very supportive of the creation of an all-island market. We have been working closely with the regulator in Northern Ireland and the two relevant Departments, North and South, to progress matters. We are part of a committee the two Ministers established last July. While plenty of preliminary work has gone on, a political decision will probably be required ultimately. We are ready and willing to work toward that end.

Transmission and distribution on high and low voltage wires brings electricity around the country. The system had fallen into less than optimum condition over the years as a result of lack of investment. We have approved a very significant investment programme over five years of €2.5 billion to bring the network up to standard. Another aspect of the network is interconnection with adjoining regions. Currently, we have a single interconnector with Northern Ireland and assessment of a second is ongoing. Last year, we engaged consultants to examine an east-west interconnector, the idea of which has been around for a good many years. The report we received and analysed concluded that it was in Ireland's interest to provide east-west interconnection from County Wicklow to Wales.

While the interconnector would be reasonably expensive, over its lifetime it would be a positive investment. I wrote to the Minister in December 2003 and he reverted to me recently with a Government decision to investigate further the idea of what is termed a "merchant interconnector". Someone would of their own volition construct such an interconnector without underwriting by the commission or the Irish electricity consumer. To that end, we placed advertisements in the newspapers, including the Financial Times, last Friday. We have allowed some time to see what kind of response we receive. East-west interconnection is an issue in terms of the security of supply and inward investment. There are pluses and minuses.

An issue which has been to the forefront of people's minds recently has been what has become generally known as the wind connection moratorium. Just before Christmas, the ESB national grid, which is charged with maintaining a safe and secure system, came to me and said we should pause to consider how much wind can be dealt with on the system. Currently, we have just over 200 MW. Following the success of the Minister's AER VI competition, we may have anything up to 700 MW. As there is a further 700 MW on the system, we could see up to 1,400 MW of wind generation. The system currently has an estimated 5,500 MW which means wind constitutes a significant proportion. Wind has various characteristics, one of which is that one cannot decide when it will blow or not. If there is no wind, one has to have back-up support and if the wind rises suddenly, system stability becomes an issue.

When the grid made its proposal to me, the moratorium was originally to be for one month. It was subsequently extended to the end of March. Various processes involving the industry in consultations have been ongoing to try to work out how to move forward. We are making progress and hope to be in a position to make final decisions by the end of April. The grid has made various recommendations on how to move forward. There is a system comprising the grid code and the transmission code, which in effect are the rules of the road for operating and connecting to the electricity system. No wind farm should be allowed connect to the system unless it meets the grid code.

A committee has been sitting for the past six months looking at grid code criteria for wind energy in particular. It is due to submit its document to me in the next few days. We will consult on this for a few weeks, after which we will be in a position to comment on it. If there is too much wind it interferes with the stability of the system and the committee is concerned to decide how much wind should be on the system, the dynamic characteristics of the windmills and what effect they have.

Last year we commissioned a study by a company called Garrad Hassan, which concluded it should be possible to have about 700 MW on the system before there is a need to do anything. Beyond that, one may need to constrain windmills from time to time and have other controls, but this should be manageable. We reckon we will have reached a reasonable conclusion on this matter within a month. When the whole process began, it was rather "in your face". It has now become much more workmanlike, and I believe we will reach a satisfactory conclusion that will work in the long run. It is no use if it works only in the shorter term.

I have a duty to promote renewable energy but what has happened latterly is that renewable energy has almost crystallised as wind energy and nothing else, whereas there are 11 forms of renewable energy mentioned in the legislation under which we operate. Some of these are quite expensive of course and we should start encouraging them, particularly those that can be controlled and which do not cause any dynamic issues in the system. We should continue to work towards this goal.

Another matter that has arisen latterly is the greenhouse gas issue. The EU has a new scheme derived from the Kyoto Protocol, whereby people will have a cap on the amount of carbon they can issue each year. Beyond this, they will have to buy the carbon credits to meet the requirements for their output. The Government submitted its plan to Brussels on 31 March and the power sector is covered by it. Renewable energies do not emit any carbon or get any credits and therefore the operators have nothing to sell. Power stations in Ireland have currently about 77% of what have been regarded as their normal emissions so they are stuck with buying 23%. Their having to buy will add about 7% or 8% to the generation cost of electricity and about 2% to 3% to the retail cost. On average, generation costs about 5% of the total retail cost of electricity. However, what does one do with the other 77%? If one only forces companies to pay for a quarter of their requirements, one is dampening the environmental signal very seriously. This is meant to be an environmental directive to make sure the renewables have enough headroom to prosper and to encourage clean generation.

The Minister and his Cabinet colleagues should consider allowing the full cost of carbon - known as the opportunity cost - to be charged by the generators. We should be empowered to levy and recover these windfall gains and recycle them into the networks, which are paid for by everybody. This would deal with the competitiveness issue. It would give the proper signals for generation, encourage cleaner generation, give the right price signals for new entrants and give renewables enough headroom to make a go of it. The practicalities of achieving this objective will not be easy to work out but we think it is possible. I am very pleased the Government has accepted this proposal. It will require new legislation and no doubt it will be debated in the future. This scheme takes effect on 1 January 2005.

On an island such as this, it is important that we always have enough power stations operating in the system to ensure we meet the requirements, not only in the valleys of the summer but also in the peaks of the winter. We are still trying to ensure that the market operates properly and sends out the appropriate signals.

ESB national grid produces a forecast every year looking seven years ahead. Based on this it was clear that issues would arise in 2005 and even last winter. We took various courses of action in conjunction with the ESB. The ESB has been rather helpful. I welcome the contract with Ballylumford power station, located outside Belfast in Northern Ireland. The contract specifies a capacity of 170 MW. Furthermore, we agreed the installation of some smaller units to meet winter peak demands. These will stay in place for the next three years.

We instituted and facilitated a competition for new power stations, whereby the output would be bought by ESB for up to ten years. As a result, two contracts have been awarded. One is to Aughinish Alumina in Limerick to build a 150 MW plant. This is a CHP plant where the steam will be used as part of the process in the factory. This is a very welcome development. The other contract has been awarded to another developer called Tynagh Energy Joint Venture and it is for a 400 MW plant. Work has already started on these projects. We are monitoring them carefully and making sure the companies concerned comply with regulations.

The natural gas is unlike the electricity market in that nothing is manufactured. It is a question of moving the gas around. The commission assumed responsibility in April 2002 for the regulation of the natural gas market and had to try to put in place a system to have the market operate in such a way that people could compete in it. We have worked with the industry very strenuously over the past two years and we are making progress. We reckon we will have most of the procedures in place for the coming gas year, which commences in October.

Until recently, entities had to buy their gas in the United Kingdom because we only had the Kinsale field. We now have the Seven Heads field, which is unfortunately suffering some difficulties at present, as the committee may be aware. We look forward very much to the Corrib field's coming on stream. It is very important for us to develop our own fields and ensure security of supply, particularly as the United Kingdom will have gas supply issues in 2006. The more of our own gas we have, the better.

Those importing gas must have it transported through the high-pressure and low-pressure pipes. We have devised, in conjunction with the industry, tariffs for doing so. Regarding gas transmission, a question arose as to how to allocate the costs of the second interconnector, which is still not in full use. We also reviewed Bord Gáis's retail tariffs, which had not been reviewed for a long time. These tariffs have grown up piecemeal over the years. In fact there are eight or nine separate tariffs in the residential sector alone and we have commenced putting some order on these.

Although the tariffs were published tariffs, they were observed more in the breach than otherwise in that discounts and other criteria applied. We had to deal with a kind of mishmash but we have now dealt with it. Some had increases which were serious enough and others saw no change at all in their tariffs. The market is more or less settling down and we have in place most of the procedures for putting it in order.

The commission has also assumed responsibility for safety in the gas system. Of course Bord Gáis makes sure it runs the system safely but we oversee its activities and set down some of the rules and obligations. We have established a committee to bring people's attention to what is required. Unfortunately, during the year there were some deaths in houses from carbon monoxide poisoning. They were not due to anything done by the gas company but to poor installation of facilities and the blocking of vents in houses. People died in their sleep. We must bring to people's attention to the fact that they must ensure the installation is carried out properly.

There was also an explosion in which people were injured and a house damaged. This was due to a fracture in a cast-iron pipe. We still have pipes distributing gas which were installed by Dublin Gas in the 1960s. They break from time to time whereas the new plastic polyethylene pipes are far better. We have agreed an accelerated programme for replacing the old pipes.

As in all industries, everything keeps moving on, and the EU passed two directives last July, one pertaining to gas and the other to electricity. A regulation has also been passed on cross-border trade in electricity. All these will come into effect next July. It is for the Minister to introduce the appropriate legislation to implement their various provisions.

I have touched on only a flavour of what is facing us. There are other issues such as fuel diversity and Moneypoint which arise for us from time to time. We issue all types of licences and do day to day work as well. If there are any issues members wish to raise I will be happy to discuss them.

Mr. Reeves said that during the past three years there has been a significant increase in the ESB retail price of electricity. As a percentage, what was the increase in the cost of electricity over the three years?

Mr. Reeves

Over 20%.

In relation to the Competition Authority and its response to the agreement with ESB and EirGrid, will Mr. Reeves comment on an observation he made? When people think of electricity they think of the ESB and a monopoly. They speak about an excessively costly system of contractual relations between the ESB and EirGrid. However, higher than necessary transaction costs are only part of the problem.

In the authority's view the proposed contractual terms lean heavily towards the State mandated monopoly provider, ESB, rather than the purchaser, EirGrid. Given the incentives under which the ESB operates as a result of its dominant position in electricity generation, it seems reasonable to assume that the proposed contractual terms are likely to impede new entrants into electrical generation, thus maintaining the dominant position of ESB and paradoxically the proposed contractual rules may raise transaction costs or reduce the threat of new entry into electricity generation. What is important is any impediments to new entrants entering the market. It is only when there are new entrants that there will be competition in the marketplace. At present there is little competition in the marketplace. How would Mr. Reeves counteract what the Competition Authority has said in that respect?

Mr. Reeves

I could not disagree with much that the Competition Authority decides. I have been in touch with Ministers and Departments over the years on this dominant issue for the ESB. In its wisdom the Government has signed off on how it wishes to deal with this. When it signed off and put it into legislation I got on with doing what it said should be done.

The issue of dominance always emerges because ESB is the dominant force in all of this. Electricity business comprises four steps in the chain: generation, high voltage transmission on the lines, low voltage distribution and the sale. ESB spans all of those. The licences and the EU rules specify that the wires have to be independently out of those. How does one actually run the power stations? Who decides which power station runs? That is what will be called EirGrid; currently it is called ESB national grid. It is independent of ESB so it has no financial gain, one way or the other, in respect of what power stations are to be run.

EirGrid will also decide when and where new lines are to be built. The Government has decided that ESB shall do the building and the maintenance. That is the contract the Competition Authority is talking about. That contract has proved to be horrendously difficult to complete and we had to issue a direction as to how it should be done. One of the parties, EirGrid, took me to the High Court on that particular issue. The establishment of EirGrid should have happened more than three years ago but that has not yet happened for various reasons. I regret that. It would be much better if things were cleaner and there were cleaner breaks among all the different aspects.

ESB will always argue that the best way to run the power stations is to have a whole fleet of power stations but that makes it extremely difficult for new entrants to enter the market. If the price is too low in the generation market it has to be balanced around the various sectors. People will not invest €250 million to build a new power station because it is difficult to guarantee returns. In the new market we are keen that we should have the right signals to do this. So far we have only one independent generator which came in of its own free will, Viridian, the Huntstown power station near the airport. All the other stations have come in on the back of contracts.

All renewals have come in with contracts with the ESB. The Edenderry peat station, which was there beforehand, had a contract with the ESB. We ran a competition for Aughinish. Tynagh has contracts with the ESB. That is not how we want this market to work. People should be able to invest in this market in the same way as in any other market. In the new market we are keen to shine the light so that people will get the right signals to invest. While people may criticise the new market it is transparent. People can see what is happening at the various power stations in different parts of the country. They will be able to select where to buy and will be able to manage their risk properly in this market. Everywhere there are artificial divides and where new entities are being established there will always be transaction costs, institutional pride issues and so.

In the case of EirGrid and ESB they are both still the same company and it is always difficult to divide those. There are two phases to it - the infrastructure agreement, which is a contract, and to move the staff into the new company which was supposed to take place on foot of what is called a transfer scheme. There is no sign of this transfer scheme.

Does Mr. Reeves have any role in trying to expedite the process or does anyone say this has to be done within a certain timeframe?

Mr. Reeves

No. I do not have any role in this. The Act provides that the parties have a duty to do that. When they failed to put the infrastructure agreement in place I issued a direction, which is the reason one of the parties took me to court. That is now effectively agreed. No staff has yet been appointed to EirGrid from ESB. I have written to the Minister about this. I am not trying to wash my hands of these issues but I do not have the statutory power to do these things. When the Minister came before the joint committee he said the model he has put forward is the one with which he will continue. Therefore, I have to work within that framework.

Has Mr. Reeves written to the Minister stating these impediments and constraints? For example, Viridian, as an independent entity, has approximately 10% of the market. Therefore, by definition, if the ESB still has 90% of the marketplace - the other companies, including Edenderry - how can Mr. Reeves say there is a competitive environment out there in order to encourage more Viridians into the marketplace? If as Mr. Reeves says he does not have the teeth, is he telling the Minister there is an impediment and that the monopoly cannot be broken unless X, Y and Z happen?

Mr. Reeves

I wrote to the Minister at the beginning of December. Before that I issued a draft paper to him. I made a formal submission to him in December on how I thought this matter should be rectified. The Minister considered it and decided he would continue with the present model. There it rests. If the Minister does not wish to take my advice that is his prerogative.

It would not be the prerogative of this committee to criticise policy decisions as such. In this situation are we trying to stimulate competition if that approach is adopted?

Mr. Reeves

There are many things about competition - it is not only the EirGrid function but the large size of the ESB power generation itself. If the ESB is allowed to work en masse with 80% or 90% of the capacity and one person has only 5% or 10%, it is difficult to compete against it. I have never said the ESB should be privatised but it should be restructured. I have always said the power generation part of the ESB should be restructured in order that these power stations would act as if they were independent entities, and in their own self-interest. I have never suggested the ESB——

What is the point of all of this? Is it the position that the emperor has no clothes? Mr. Reeves has told the joint committee that electricity prices have increased by 20% as a result of his activities and those of the commission and the policy that has been undertaken for the past six or seven years. Gas prices increased by 9%. We had some of the cheapest electricity prices in Europe and we had a secure supply. We had a long-standing investment programme by ESB. What is the purpose of all of this?

In the contest for the two tenders for the new generation stations, I note Viridian, the only company that appeared to have some experience in the market, was not successful. In respect of those two contracts I note that people are selling on the licence. It appears people are coming in, as we saw with the Spectrum licences, earning a packet and moving on before we get any additional generation. What is the point of it?

This is a very small electricity market; it is about the size of Kent in the UK or a very small German state. What is the point in this rigmarole? I know there are European directives and so on, but my constituents are paying much more than they should for electricity. We have an electricity company that was able to give a dividend of €250 million to the Government in recent times. Does the emperor have any clothes? What is it all about?

Mr. Reeves

It goes back to the Single European Act of 1989, which was concerned with free choice and movement of goods, capital and people. There are three or four directives relating to electricity under this regulation, which was devised by the entire European Parliament and Council. We are implementing that.

Electricity is much more expensive than it used to be.

Mr. Reeves

The price of gas on the wholesale market in the UK has trebled in the past four years. The price of oil has gone up recently. The price of coal used to be about $30 dollars per unit amount; it is now more than $70. The price of fuels comprises half the cost of generation - in other words, a quarter of the final retail price. There was almost no investment in the network. Over a few years it had £10 million to £30 million worth of investment. We have now invested significant amounts of money to raise the quality of the network to what it should be.

That would have happened anyway.

Mr. Reeves

It would not.

Mr. Reeves

It would not. ESB prices had not increased for many years. They decreased in 1986. There was a 1% increase in 1987 and nothing else. All prices had gone up. The network had run down significantly and the ESB had old stations. Moneypoint is now 17 years old. We need to keep adding new stations, and they do not come free.

I am not suggesting that they do, but there were programmes going on. I accept what Mr. Reeves is saying but I do not agree with it. This is a small market, which will shortly be linked to the UK market. We will be acting as a small part of that market.

What happened to the two new electricity generators? Mr. Reeves said that work had already started. Is he concerned that companies seem to be able to get a licence and then move on? Many people were taken aback that the companies mentioned by Mr. Reeves, who had some experience in the market, did not get contracts.

What about security of electricity supply? Is there a danger that we are heading down the same road as the Italians? In that country the national grid depends on those of other countries, perhaps with inherent difficulties. We could be sucked into a system like that of Italy or California, in which we end up with an insecure electricity supply.

Could we have a further explanation of the wholesale trading mechanism? Mr. Reeves said it was a temporary mechanism. How does he see it developing? Is it the case that at the start of 2005 the ordinary domestic consumer can simply indicate which company the household wants to deal with? How can it be ensured there will be no additional charge for moving accounts from ESB to Viridian, for example?

When does Mr. Reeves expect the issues of the grid code and the other codes to be sorted out so that we may have a stable input into the system from wind energy? When does he expect AER VI to be realised? At that stage about 700 MW out of the 5.6 GW in the national grid will be provided by wind energy.

The European Union's plan for complying with the Kyoto Protocol is being embarked on unilaterally, which puts us under additional pressure as we will be competing in world markets against countries such as the USA which have disavowed Kyoto. We are doing this out of altruism.

I thank Mr. Reeves for his informative presentation in which he provided a background to these issues. I have recently heard people talking about the capturing and removal of CO2 from all generation. Has anyone come up with any figures for the cost of doing this? This would remove CO2 from emissions from the start, so that the system of levies and trades would not be required.

Mr. Reeves

The Deputy may need to help me if I do not get through all his points. He mentioned the two projects that won the recent competition in connection with selling on their interests. There were many approaches by interested and disappointed parties, but no shares can be sold on without approval and nothing like that has happened. The work is still going on. We ran the process openly, carefully and thoroughly and we can defend it in all aspects.

The Deputy wondered whether we were going the way of Italy. The Italians are importing perhaps 20% of their electricity, which comes across Switzerland from France and across Slovenia. That is probably too much. At the time of the power cuts there was much wind in the system. The Deputy is smiling, but he can see in my note the explanation of how the fault goes through the system. The fault moved into Italy, tripping off the windmills, which created a cascade. The system failure in the eastern United States was caused by trees. It is vital that the lines are kept clear of trees because they can cause short circuits and the fault cascades.

An electricity system is like an investment portfolio; one must have a little of many things and not too much of anything. Most European countries have approximately five fuels in their generation mix. A certain proportion of their power is imported. If the mix is right all eventualities can be covered.

The Deputy mentioned the wholesale market, which I said was temporary. At the moment we have what is known as a top up and spill market. If I agree to sell the Deputy 100 units of power for his factory but the factory only takes in 90 units, the ten extra units are still in the system. If my generator breaks down and the Deputy's factory is still working, it is consuming power that I am not producing. We have a settlement system in which the ESB will buy and sell that power. Sometimes it makes money from this and sometimes it loses it. We are introducing a market which takes ESB out as the counter-party so that it does not need to carry this risk, which is shared out among everybody. We are trying to come up with a long-term arrangement. The current system was supposed to last for five years. That was the policy direction I received at the time. The injunction was to change it and we started that process of change two years ago.

From 19 February 2005 everybody will have a choice of supplier. The cost to the customer of moving should be zero. We have tried to facilitate a change-of-supplier process and the systems are currently being set up to manage this. We would like this to run as smoothly and simply as possible.

The grid code should be with us by early next week. The original date was 9 April, which is this Friday, but I am not sure we will have it by then. We are going out to consultation on that and we will see what people have to say about it. The code was developed co-operatively. We had a representative committee, with members of the Wind Energy Association and representatives from ESB national grid and various other generators, whose members agreed on this, so I do not expect much variation. I hope that by the end of April this will be finalised and there will be a clear regime for the future.

The AER VI projects must be in place by the end of 2006 and by then they should be supplying 700 MW to the national grid. If we go beyond that there are times when we may have to constrain wind farms - this is technical, nothing to do with money or the contracts. We cannot give an instruction to a wind farm to come on because it is not possible to guarantee the wind and currently we cannot give it an instruction to switch off. Control systems to deal with that will have to be put in place. It might only happen rarely but as more wind power is used it will become more common; it will be self adjusting. We have some old farms which will be replaced with new technology which will have these systems so they will work more efficiently. As technology develops, the sector will improve.

The EU has drawn up a directive on the carbon issue, although I am not aware of research into capturing carbon because it may not be possible. Research is going on in the United States and Europe, however, into clean coal technology. Every fossil fuel produces carbon. To produce 1 megawatt of electricity in a coal fired power station, 1 tonne of carbon dioxide is produced, while a gas fired power station produces 0.4 megawatts of carbon dioxide. Gas produces less carbon but the world has so much coal that it will be used. Research is ongoing into clean coal technology, where carbon dioxide, carbon monoxide and impurities such as sulphur dioxide are removed from the coal, leaving hydrogen to burn. It is not cheap but the technology has existed for a long time in the chemical industry. It has potential for the future because there is so much coal in the world that someone will develop something to make it clean.

How will we get rid of this carbon? We are looking at sequestering it in spent gas and oil fields deep in the sea, although that is still some time away.

There is a moratorium on wind energy at present. There were wind energy projects in Limerick ready to go but they had to be connected to the ESB transmission grid and the moratorium has affected all of them.

Currently wind energy generates 200 megawatts but the capacity exists to increase generation to 700 MW. Has there been any exercise to examine the capacity of all the wind energy projects in the State that have been given planning permission? They hope to be connected to the network.

Mr. Reeves

ESB national grid has received applications to connect up to 1,500 MW on to the system. Most of those have planning permission.

That exceeds the 700 MW capacity.

Mr. Reeves

Some of them may be refused connection offers or given conditional connection offers, such as an ability to switch off at certain times or technology that complies with certain regulations. I have not signed off on the four issues of compliance. They are still up for discussion.

I know people involved in wind energy projects who enthusiastically went to get planning permission for 20 wind turbines. The argument in many cases against planning permission was the hen harrier population but those involved won the argument and got planning permission. They had expectations that have not been fulfilled because of the moratorium. If there is capacity of 1,500 MW on a national basis that cannot be taken by the system, why are false expectations being given when there will not be any connections to the system?

Does the moratorium apply to the ESB subsidiary, Hibernian Wind Power?

Mr. Reeves

It applies to everyone except those who have already built wind farms.

How can we differentiate between the two groups if there is excess capacity trying to get into the system and it can only sustain a certain megawattage?

Mr. Reeves

The connection offers are made on a first come, first served basis so there is a queue.

Can people establish where they are in the queue?

Mr. Reeves

There is a process of a number of days in which they should expect to get an offer.

Where can they find information about where they are in the queue? Does ESB tell them?

Mr. Reeves

I believe ESB used to publish the information about applications but I am not 100% sure.

That should be checked because this is a major issue.

I thank Mr. Reeves and his colleagues for coming in. I have been looking forward to this meeting and it should not be the last we have. The Minister is always joking with us by asking how come we have not talked to the regulator when we mention energy. It has taken us a while because we have been busy with the telecommunications industry and others, but we will be paying attention to this area in the next six months. I hope the delegation can return at the end of the process when we have talked to others in the industry because we will then have specific questions.

This is a difficult area because it is so vast and we are skimming across a mass of issues in a short time. There is also a great deal of technical detail. The virtual market systems and European regulations have given rise to incredibly complex market arrangement systems.

The regulator's paper sets out the reasons market prices have risen in the last three years by over 20%. I thought the main reason for the increase was to attract new competitors to the market by offering higher prices. With the new market mechanisms coming into force in February 2006, economists are saying the mechanisms are so complex and uncertain that it will be impossible to get financiers to back new power generation plants.

We have not inserted a "use it or lose it" clause into our emissions trading system, where if power generation is not continued in old oil or coal fired power stations, the valuable quota for carbon emissions will be lost. In such circumstances there will be an uncertain market, it will be difficult to establish new power plants and the State will have to use the existing plants. We will continue with the carbon-heavy electricity generation process, using coal and peat burning powers stations in a world where carbon will be counted accurately. We will be remarkably polluting and that factor in the new market mechanism has been rightly criticised.

Before I move on to the second issue, I note the report states that the commission has a plan and that it recognises there may be difficulties in terms of getting new supply but that it has a fast build plan in case no new investment in new capacity comes forward. I have not heard that before and I would be interested to know what is the fast build plan if we are running very close to capacity and we need to get priority on erecting plant quickly.

My first question is in regard to market mechanisms. How does Mr. Reeves answer the criticism about the uncertainty surrounding that issue and the fact that it will lead to our maintaining a highly polluting plant?

The second area I want to address is one of keen interest to our party, namely, the development of renewable wind energy. Uniquely in this country rather than other countries I have visited, there appears to be almost a hostile approach to the introduction of renewable energy. We constantly see, almost on a cultural basis, the difficulties rather than the opportunities in this area. I visit other countries and it is a case of progressive, ambitious programmes but here we hear nothing but the technical difficulties found in the area. That is remarkable in a country that has so many wind resources and so little wind power developed. I read a report in recent days that even in America they are looking at almost 2,000 MW of power coming on every year. In Germany, 16,000 MW of wind power are generated. I find remarkable the level of resistance to wind power from the institutions involved here in the electricity generation area.

To get down to specifics, Mr. Reeves said the commission has agreed to the moratorium on the basis that when all the AER contracts come in we will have a significant amount of capacity. I put it to him that the nature of the AER system which led to a competitive bidding system, right down to the finest point to try to win a contract, was such that the vast majority of those AER contracts will never go to construction because the price was bid too tightly, they cannot get a connection and a range of other different reasons. Our experience on AER V is that none of the contracts has gone to production; if any have come onstream, it is only very recently. The fear is that the same will happen with AER VI. What makes Mr. Reeves think all those AER contracts will come on line so quickly?

With regard to the Garrad Hassan report, the remarkable aspect of that report from an outsider's point of view appears to be the divergence between the executive summary and the actual contents of the report. I clearly remember reading in the detailed contents of the report a comment by Garrad Hassan Consultants, experts in this area, that we can introduce approximately 2,000 MW of wind power in the system before the constraints of such power become a significant issue. I do not have a problem with the constraining of wind power if that becomes an issue at that stage, but why are we not taking that figure, which is included in the detail of the report, as the target we should aim for before we start constraining or perhaps Garrad Hassen was incorrect in that detailed section in the body of the report?

In terms of wind power, stability and threat to the grid, I put it to Mr. Reeves that the biggest threat to the grid at any one time is the ancient and, as I described it the other day in the Dáil, the clapped out fossil fuel burning plants we have which are only running at an operational capacity of some 75%. The real risk to the grid is the MW or whatever size, which is a far greater threat than any potential threat from the wind dying or blowing up suddenly. Is that not the real concern in terms of the difficulty in meeting capacity issues? The lack of predictability and capacity from existing plant is the real issue, not the inability of wind power to provide stable and reliable power, even though on certain occasions the wind will not blow. On the occasions when it is blowing, however, and if we have a large number of plants operating due to the strength of having a large number of small suppliers rather than a small number of large fossil fuel plants that can shut down just as quickly, is it not the case that in those circumstances wind actually provides some security to the grid which the current grid does not have?

Is it not also the case that those plants also failed to meet the type of grid code requirements that are being looked at and that to blame everything on wind power, as if the other power plants are meeting all the grid requirements, is inaccurate?

In terms of how much wind we develop, have the plans taken into account the possibility that we will have the interconnector given the length of time it takes to build wind plants? We have only built 200 MW in the past 15 years and we are looking at another five years at least before things start to happen on the ground. In that time we will have an interconnector. Has that been taken into account by the ESB grid company when it comes to predicting how much wind we can have on the grid? If we have that we can start exporting wind and importing alternatives when the wind is calm or during anti-cyclonic conditions.

I am sorry for the number of questions and I will try to be as brief as I can on the other two. As I said, this is a technical——

I will allow you come in again but perhaps Mr. Reeves will deal with the module on wind energy.

I have to go, Chairman. Do you mind if I finish asking my last two questions?

I was trying to help both of you.

I will be very brief. The emissions trading regime is a complex area. I have only just got my head around it after two years of studying it. Having got to grips with it, the commission, possibly rightly, adds another twist where we are recycling the windfall gains these power plants will make. I would be interested to get more detail on that because I do not quite understand it. Mr. Reeves said it will be recycled into the networks. I would be interested to hear the detail of what is planned in that respect because I cannot get my head around what is actually planned. I am surprised Mr. Reeves said some 70% of emissions are being provided free quote. I understood from the Government allocations that it was effectively 95%. I would be interested to know where the difference is on that.

I apologise for asking so many questions. Mr. Reeves can answer them today or on another day in the future. I am interested to know our long-term strategy. Department officials came before the committee a few weeks ago and I had a strong sense from them that there was no long-term vision in terms of 20, 30 or 50 years. If we are building plant today, that is the timeframe we have to be considering. How many gases will exist in 30 years' time? What environmental restrictions will be in place in ten years' time, let alone 30 years? I did not get any sense from the Department that it had any view as to how much gas we should have. Mr. Reeves mentioned the five or six different sources we should have. What is his long-term strategy? What is the strategy for 2020 or 2050 in terms of from where our energy supplies will come? Will they all be gas in 2020? How much will be renewables and how much will be oil or coal?

The clean coal technology Mr. Reeves talked about is a misnomer. It might be clean in George Bush's mind but environmentally it is one of the dirtiest industries imaginable. The technology in terms of carbon storage is debatable and, as Mr. Reeves said, highly expensive. An alternative exists in terms of renewable energies and that is what we should be pushing. We should be looking at storage technologies for those renewable energies.

Regulating peak demand using demand management measures should be our first priority so that we do not have the evening peak demand every day. Once we have those demand measurements we can get much more wind on the grid. We should be moving towards that sort of positive thinking rather than just seeing the negative and saying we cannot take more than 700 MW of wind, which makes it an embarrassment in international renewables circles.

That was said at the European Investment Bank conference in Dublin some months ago. It was remarkable that one international speaker after another asked what was going on in this country that it alone is unable to develop renewable energies. It was an embarrassment. I do not direct that comment to Mr. Reeves but to the Minister, the Government and the people responsible in this industry. I am sorry for the long rant but I have been looking forward to this meeting for a while.

The Deputy was very interesting.

Mr. Reeves

I recognise that the Deputy has to leave shortly but we are happy to sit down with him on a one to one basis at any time to talk about all these issues. The same goes for any other member of the committee because it is an extremely complex business. The only reason we now know it is complex is that we can see it. It was always complex but it was always internalised in ESB.

If the Deputy wishes I will deal with the issues from the start or perhaps begin with the end of his contribution. On the long-term strategy, in conjunction with the Department we currently have a consultancy study examining, for example, the way we deal with the future of Moneypoint in the context of fuel diversity and the right programme this country should have in the future. If this is a market, and not a centrally planned market, people will come forward with their proposals on what they regard as most economic from their own perspective. There is no laid out programme of what it should be but there must be guidelines and limits, and that study is under way.

I agree with the Deputy on the demand side. In our new market we have a demand side module where people can build in those.

We have two programmes on the demand side for a peak day and for the first time in 20 years this winter's peak was lower than last winter's, about which we are quite pleased. We would like to see more of that. If people get the signals on a daily basis they will not do that. For example, most industry tariffs from the ESB do not have a time of day signal. The Deputy's tariff and mine are the same price, winter, summer, morning and night and we receive no signals. Until technology is adequate and people can see the price each half hour they will not change. Behavioural change is half the battle, beside technological change. Until people see that electricity costs them money and they can leave the dishwasher off until 8.30 p.m., they will not change their behaviour. The peak is driven by homes, not by industry.

The electricity sector received 92% of its historical emissions over the average of 2002-03 but that must be spread over more stations now than there were then. The EPA, on behalf of the Government, decided not to allow the dirty stations benefit from the advent of renewables. If renewables form part of one's new generation portfolio the old stations retain material that should have been reallocated among other stations, so the advent of renewables has meant that some carbon credits were subtracted from the electricity sector as well. The upshot was that everyone got 77%, not 92%. It took us some time to get behind that. That will last until the end of 2007.

The issue of closures and what is retained and what returned is fraught. It is possible to argue both sides and one must take a reasonably pragmatic view. One can keep the credits and allow the old dirty station to plug away and earn money. Alternatively, one can half close it and sell off the credits to another operator in the market. It may require more time than we have here to outline how we would measure how much——

Was that a national directive and not a European one?

Mr. Reeves

Is the Deputy referring to the recycling directive?

No, to the "use it or lose it" clause.

Mr. Reeves

Each country made its own choice in developing its plan. We could have allowed people to close down on the first day and keep their allowances for the three years. In that way they would have got money for nothing. This involved an industry where people had two plants and all types of processors - it was not just electricity. It is never simple, never a clean break.

There is no hostility to wind generation. Until this year only 20 MW have come on to the system. The AER V was not a success because prices were not good. People who received AER V contracts were allowed to convert them into AER VI contracts. We have received many applications for authorisation to construct and operate these stations. The AER VI wind farms will come on stream at the end of 2006, which is the basis on which the contracts were issued because the other ones did not have a timeframe or limit. They were not bonded to do anything. Once they received their contracts they could go away without having to do anything. Now they will lose it if they do not deliver because the aim and object was to get the wind farms on to the system.

The issue of where to constrain wind farmsis difficult. I am not a power engineer and cannot answer the question except to take advice from those who know how it is done. I cannot say where the 2,400 or 1,500 is all——

Can we return to the issue of the separation of EirGridfrom ESB national grid and the ESB, which clearly has not happened? The Minister made that point at our meeting with him and Mr. Reeves has said it here today. To an extent they provide the advice. Would Mr. Reeves not agree that as they are the owners and managers of those other possible power stations they are not exactly neutral on the issue?

Mr. Reeves

I disagree with the Deputy. ESB national grid has run independent minus activity, much to people's irritation at times. It might not be friends with everyone but at least it has acted fairly and without discrimination. This is honest and fair. This applies to everyone, including ESB subsidiary company wind farms.

The operation of the wind farms involves voltage support and megavars required to keep it going and they do not produce stability on the system that the heavier power stations do. It is a form of inertia and we would need to discuss that at more length.

Plant does break down or not work and one has always has instant and secondary reserve to deal with those events. The Deputy is right that on average the availability of the ESB power stations has been awful in recent years, running at approximately 75% when they should be 10% higher; every 1% of availability is 100 megawatts. In the next round of arrangements for electricity prices next year we will have much tighter performance criteria for ESB power stations to ensure that they perform, otherwise it will cost them money.

On mainland Europe there is high usage of wind. All the countries and the transmission system areas are interconnected. Denmark has at least 1,500 megawatts of interconnection. They are AC interconnectors, like the ordinary lines in the system. There is no control on them. If the system goes down here the electricity will automatically flow in, whereas the interconnector under the sea, the one for example that runs from Scotland to Northern Ireland, is a direct current. One switches it on or off. It is not a flux in the system.

We are also told that weather systems in Ireland are bigger than the country and very rarely will one find wind blowing here and not in Wales, or vice versa, and this arbitrary situation for wind between the two countries is lost in the noise of the amounts of electricity involved. It is very peripheral. If an interconnector could be in place in five years I would say well done. The building of it will not take five years but the planning could. The line under the sea is only a fraction of the effort required. All the lines on shore and the reinforcement of the grids on both sides take more work. It could be a long way across Wales to hook into a strong point on the Welsh grid before we could do it and the lines along the east coast would need some strengthening to take this line on board. The Government has requested two of these and that requires major investment on shore to absorb these lines because they are significant events. It is not as simple as hooking and clipping the line. It is a large project.

The normal process of planning and building a power station may take five years. The construction takes 24 to 30 months, depending on the location. If after 30 months no one has come forward and started building we have a problem. The plan is to request EirGrid to get a site in a suitable location for a peaking power plant, do all the planning, keep options on the purchase of equipment, have the connections ready to go. One can build these open cycle stations in approximately 12 months. One would decide, within the timeframe when an independent company was going to build a unit, to build this plant which would help one to meet demand at the time, and then be required to sell it off.

It is not the function of the ESB national grid to own and operate power stations. Its duty is to operate the system. This is an insurance provision to ensure that we do not run out of power.

What does Mr. Reeves mean by "open cycle"?

Mr. Reeves

I apologise for the jargon. There are two types of gas-fired power stations: an open cycle and a combined cycle. An open cycle operates by putting it into an engine similar to a jet engine and taking the power off the spinning of the engine, the exhaust being released to the sky. In a combined cycle the exhaust which comes out at approximately 800 degrees Celsius is taken up to make steam under pressure, which in turn is used again to make electricity, thus creating a combined cycle. For 100 units of gas, the open cycle will give 32 units of electricity. With the combined cycle, it is 58 units, making it twice as efficient. The new stations in Ringsend and Huntstown are combined cycle gas turbines with two cycles of fuel and steam. It gives the best and cheapest output and is cleaner than using other fossil fuels.

The electricity industry is complex and varies all the time. The price of electricity in the wholesale market varies every five minutes. For example, in the north-eastern states of Australia, the price changes every five minutes as demand fluctuates. On a summer's night with a suite of power stations, one would run the cheapest one first. If the load rises, then the next cheapest is brought online. However, on a winter's day, the dearest station will need to run. The market operates in such a way that the dearest one sets the price. If a power station only runs for one month a year, it must recover all its capital investment and fuel and operating costs in that one month, resulting in winter prices being high. That power station has been sitting there for 11 months of the year waiting for its month to shine.

Take the example of buses. At the peak hour in the morning, there could 1,000 buses transporting people into Dublin. At 11 a.m., only 500 buses might be needed. However, the crews and those other 500 buses waiting for the evening peak hour have to be costed. The same principle arises with utilities. There are enormous peaks in usage, meaning that there must be enough power to meet them. The object is to dampen that peak. In the case of car usage, if the number of cars could be reduced on the roads, one would have better traffic flow. If that expensive price for generation was reflected in the retail price I was paying, then I might not pay that. It is important that there be a demand-side reduction in the peak times. This will mean the number of power stations needed to meet the demand can also be reduced. I fully agree with the Deputy on this point.

Will Mr. Reeves go into more detail on the recycling of windfall gains back into the network?

Mr. Reeves

A power station must buy 23% of its carbon emissions credit which passes through its costs. However, if a generator decided not to bother running the station, it could sell the other 77% of credits. This is worth money to the generator and is known as "opportunity costs". However, if a generator had to buy only a quarter of it, the 77% which it got money for should not go back to it. That asset belonged to the State which the generator received for free. Instead, it should go back into the networks and reflect prices in the wholesale market. The Government could decide to have a windfall tax and take it off, taking a chance on electricity prices. However, the Tánaiste was keen on competitiveness.

The commission devised a system that gave the right environmental signals by allowing the full costs to pass through. It also gives the right price to new entrants who may not get the same carbon allowances. If that price is put up to the "dirty price", it gives more headroom for renewable generators as they can take advantage of the extra costs. By recycling it and giving more help to new market entrants, it gives more incentives to build new stations and acts as an encouragement towards security of supply in the long run.

How is it actually recycled back into the network?

Mr. Reeves

It is easy to give the equation but it is difficult to put numbers on it. Carbon emission credits are selling in the market at approximately €10 a tonne. It is a thin market and will settle out. The ESB price will set the market price for every other generator. The commission regulates that and decides from ESB-Powergen's income how much we allow for carbon emission credits. The ESB alone could get a windfall gain each year of approximately €130 million. The commission proposes to take that money to offset the income for the networks. Legislation is needed for such a proposal. ESB Corporate gets no more money as if it had passed through the 23% of carbon costs. However, everyone pays for the networks but not everyone pays for the ESB's power stations as some will be either Viridian or Synergen customers. In some states, there is no talk about windfalls and, therefore, allowing the power stations to keep this free gift. Some generators will say that they need that money to replace their "dirty" stations.

Would an independent generator such as Viridian have to recycle its windfall gain?

Mr. Reeves

Yes, it would.

How would it do that?

Mr. Reeves

The market price will be set by the ESB's tariffs, so it can price up to that or below it. The same procedure would apply to all other generators in the market. We have a charge to be non-discriminatory in all of this. The Government has a number of choices with the ESB because it is State-owned. It could have decided that it would not let it go through and simply deal with the 23% carbon credit and take the chance for a new investment. The Government could also have decided to let all the regulations come through and then take a dividend out of the ESB as it owns it, allowing Viridian to keep its, or the Government could have allowed a windfall gains tax. These have been occasionally used in the UK when various anomalies occurred. However, that does not help competitiveness as the price of electricity will be higher.

In some parts of Europe, it is reckoned that prices will rise by 30% because of this. The price setter in many of the European markets is coal stations. In the Irish case, it is generally gas and oil. This is potentially €130 million per year decreasing because the amounts of windfall percentages will drop as the amount of carbon is spread over more stations.

Mr. Reeves stated that 12,000 customers would have a choice to purchase their own electricity requirements. Where in the State are these customers based? Mr. Reeves stated that the Commission has proposals to ensure electricity supplies for the winter months. If these plans do not work out, what will happen then? If there were more stations of the types in Huntstown and Ringsend, would electricity prices be cheaper?

Mr. Reeves

I cannot tell the Deputy where these 12,000 customers are exactly, but they are industrial customers of various types spread over the main urban areas in the State.

Is it only industrial customers?

Mr. Reeves

When I say industrial, I am also referring to large commercial businesses. In February 2005, household customers will also be included. There has always been electricity supply during the winter peak. However, no system can ever plan on a 100% guarantee of constant electricity because it would be too expensive. It also depends on how many power stations one needs on the system. There is a one in a thousand chance that demand cannot be met at one time. On that basis, one can model the system to decide how many power stations are required because of the probability that they might fail. The bigger they are, the more of them one needs, because if one fails, it fails in a big way. One plans on that basis. On a peak day, if one's peak demand is 4,400, one would expect to have another 600 available on the day, warm and ready to start in case something failed. Since we try to regard ourselves as an industrial and modern first-world economy, we need always to have electricity of high quality for the high-spec industries. Ironically, quality is not something people tend to associate with electricity, but it is vitally important for high-spec industries, for the pharmaceuticals and the IT sector.

Dublin is the worst place in Ireland in which to build new power stations, because it is completely congested. There are not enough wires in Dublin to get the power out. There are more power stations down around the harbour and in north Dublin than there is demand for electricity in Dublin. One has to export it from Dublin, and we have not got enough wires. Ironically, Moneypoint is in effect in Dublin, because it has two dedicated wires coming right across the country into Dublin. The idea of the new market is that there would be clear signals as to the best place to build one's power station, which currently is a place where there are no constraints, namely Knockraha, north east of Cork city. The network is strong enough there, and the forecast statement that the ESB national grid produces every year sets out in a table the amounts of energy that can be taken at various places where people could build without needing any further investment in the wires.

Mr. Reeves said that 34% of electricity is now being supplied by suppliers other than ESB customer supply. If Viridian has 10% of that 34%, where is the other 24% coming from?

Mr. Reeves

There are a number of other suppliers in the business. Airtricity is a green supplier and has some 28,000 customers. It is a significant supplier, as is Bord Gáis Éireann. Regarding the question of where they are getting the power to sell to these customers, ESB and Statoil built a station in Dublin harbour at Ringsend called Synergen. As part of an EU agreement, it was obliged to offer for sale half of its output. Bord Gáis has bought approximately 200 MW of that output.

For the last few years we also have had a scheme with the ESB involving virtual markets. This involves a virtual power station which the ESB has made available to the industry, with capacity for sale every year under the commission's supervision and control. People can buy power on a wholelsale basis for selling on. People also sell from wind farms and others are importing. Electricity is being imported from Scotland and from Northern Ireland.

Does the ESB remain involved as the dominant player?

Mr. Reeves

Yes, very much so.

Considering your role, you must surely be disappointed that on the basis of what you have told us, a statutory instrument introduced in 2000 regarding the separation of the Electricity Supply Board, and the new State company Eirgrid has not come into play. That was four years ago. Statutory instruments are legally enforceable, so why, four years later, has this one not been implemented?

Mr. Reeves

That is a good question. The reason it is a statutory instrument is that it was enacted under a European Community Act rather than as primary legislation. Certain elements were included in it which had to be dealt with. I regard the non-implementation not with mere disappointment but with absolute frustration.

We experienced the situation with the other regulator, ComReg, over which the committee is supposed to invigilate, whereby it had its power strengthened with the three-person commission. We feel ComReg should be even stronger. Is Mr. Reeves saying that he would like to see a much more forceful role, or legislation underpinning a much stronger role, for his commission?

Mr. Reeves

One cannot force people to move. Many of those working in the ESB do not want to move to Eirgrid and they cannot be forced to move. It is the same issue Deputies are seeing in the airports and in CIE, except those have not been so much in the limelight.

There are other ways of doing this. One must be pragmatic, and accept the circumstances one is faced with. I will be surprised if this happens satisfactorily in the next year or two. I have not got those powers, and it requires statute to decide what should happen there.

This committee was recently given the broadband report, the nub of which was a profound lack of investment in the national telecommunications grid. The privatisation of Telecom Éireann was a significant part of that. I know this is a policy matter for Government and for us.

The Labour Party is bitterly opposed to the privatisation of the ESB, especially given the track record of events in telecommunications. Would Mr. Reeves also have concerns that the national electricity grid should remain, as the Minister has indicated it should, in the ownership of the nation, given the problems we have been reading about regarding the 200,000 kilometres of telecommunications grid? The broadband report seems to indicate that we are perhaps three or four years behind in that area, while countries with whom we were once at the cutting edge, or whom we were ahead of, in east Asia and other places, are now ahead of us. We are years behind them. Would Mr. Reeves agree that this is a warning on the energy front, indicating that we should not allow the same thing to happen?

Mr. Reeves

I am in full agreement with the Minister that we should not privatise the networks. They are a national asset for the good of everyone in the country, and not for people to make individual amounts of money. Various other countries have done things differently.

The legislation that emanated from Brussels with regard to electricity networks is far better than the legislation for telecommunications networks. We do not have hassle about the last mile or the local loop. We have nothing like that. People are simply entitled to get on the network in both electricity and gas. There is proper separation. The ESB, for example, is not allowed to chase after customers who have left them, as happens elsewhere. The electricity and energy legislation is far better than that for telecommunications.

The networks should stay in State hands. On the basis of development plans and forecasts regarding the grid, we have approved these network investments, of which there is no scarcity. One would sometimes wonder indeed if there is too much, and think that we might have let it happen too fast, but there is no scarcity such as there is in telecommunications.

Whether anyone will buy the power stations is currently a moot point, because there is always someone to buy them. I am vehemently opposed to a private monopoly. I would not under any circumstances agree that the suite of ESB power stations should be sold off as one. If they were to be privatised, they would have to be privatised by means of some smaller packages, and not in the manner things were done in Northern Ireland, where they are still paying for it. The legacy in Northern Ireland is pretty awful in terms of the price of electricity.

The issue of ESB dominance has nothing to do with ownership, but with the mass of energy that is there, and against which people find it hard to compete. It means then that the ESB is given a hard time, because it is opaque. One does not know what is happening with it. If it were a little more open, and one could see what each power station was doing, the people of Ireland would be better off because there would be pressure on each power station to perform better. The situation Deputy Eamon Ryan mentioned regarding the ESB being down to 75% availability would change dramatically. We are not getting proper use from these stations.

Mr. Reeves referred earlier to the system market operator. In the future, who will that be, in his opinion?

Mr. Reeves

It will be Eirgrid, which currently operates operate the system. What we mean is that it calls in the power stations and indicates the merit order. It runs the market and the prices and does all the settlements and money exchanges with people. That will continue, except that there will be a different market and a different company. It is the same function. They will be independent of the ESB. That is the idea.

I want to talk about Deputy Ryan's point on windfall gains. Is Mr. Reeves considering a levy on operators?

Mr. Reeves

That is the idea. The money will pass through my account instantly.

We did not have much time to talk about gas, but it will clearly have a very important role in our future energy needs. We have an election coming up and will be otherwise engaged, but it is the intention of our Chairman to spend some time on all the energy issues.

It is striking when one looks at some of our European partners. We got a briefing on Finland and heard that they were able to rely on a huge nuclear area. I believe that around a third of their energy is nuclear. They also have biomass in the renewable sector, whereas we seem primarily to be pushing wind.

Is Mr. Reeves disappointed at the recent reports of Ramco that the gas flows seem quite bad and that there are question marks over that aspect of our gas supply? Mr. Reeves referred to Corrib. If it or adjoining fields turned out to be as promising as is sometimes said, that would also have very profound implications for the pricing of Irish energy far into the future, including how we integrate renewable energy sources. Does Mr. Reeves share that view?

Mr. Reeves

Certainly Finland has taken a different approach to matters. If we keep adding fossil fuel stations to our system, we will end up with a fairly costly system and have to buy all those carbon credits. I said that it was €10 per tonne at the moment, but if one did not buy it, in the first phase it will cost €40. In phase 2, which covers the period from 2002 to 2010, it will cost €100 per tonne. There was quite an incentive to get all that in order. Finland has taken the position that it will go nuclear and not have to buy those things. Nuclear power has its own issues, and the legislation that I have says that I cannot authorise anyone to construct a nuclear station. It would be a brave person that would come to me with such a proposal.

I said to the Deputy that 11 renewable energy sources are mentioned in the legislation, and biomass is only one. Finland has many advantages, since it has a paper industry, with pulp and thinnings and so on, which work there. The Finns tend to integrate that into their industrial operations. I am a great believer in ocean energy. The tides change every 12 and a half hours or thereabouts every day. Wave energy is intermittent but still good. The difficulty with it is the storms. We had suggested in the letter to the Minister that, in this recycling of the money, we be allowed to keep 1% or 2% to encourage work on those areas, since it is meant to be an environmental directive.

Regarding Ramco, we are all seriously disappointed. The flow has dropped off significantly and suddenly. We had put in place all kinds of arrangements for that, and it has had knock-on effects in that, since the gas is not being produced off the south coast, it must be imported. We have to make various changes and alterations to allow that to happen and not penalise people unduly in their misfortune. That is very disappointing. The offshore area is entirely within the Minister's remit, and we have no function until it reaches land. I hope that the Corrib field comes on stream, since it is in our interest.

The gas market price in Ireland is determined in the UK rather than here, since we have two interconnectors with a free flow of gas. It is set at the mythical place called the national balancing point, where gas is bought and sold. The Corrib price and its location will reflect that. However, what is important for us is not just the price but the physical availability of gas. As members may be aware, Britain, having had a great deal of gas for a generation, is now beginning to decline as a producer, and in two or three years it will be importing gas. There are not that many gas interconnectors coming into the UK from mainland Europe importing Russian or other eastern European gas. There are infrastructure investment issues that are important for us too, since we are at the tail end of all that. At the moment, we are still importing approximately 85% of our gas. We had 100% in Kinsale at one time, but that has completely swung around now, and it is nearly all imports, so we are price takers in all that. The price has trebled in the last four years. It was about £0.10 per therm, which is the unit of measurement. Now it is sometimes over £0.30.

Mr. Reeves

Since 1999. It has been up around that price and sometimes goes higher. In the price of gas, there is a daily market and a long-term market, but the long-term price seems to have stabilised for the next three or four years at about that price. We are stuck with quite a high price for gas for the next few years, despite the fact that it is the cleanest fuel. It would be nice if we had our own for security of supply. I used to be involved in the offshore business myself when I worked in the Civil Service and was very much part of this. It is not an easy place to explore. The geology means that the success rate has been very low. There must therefore be fiscal encouragement to get people to explore. Many wells have been drilled, with very little coming out. It has also been disappointing that this field has not been developed, with our planning difficulties.

I want to mention two local issues. Mr. Reeves mentioned Aughinish, with which I am very familiar, and I am pleased that they are helping with that plant down there, since it will help the long-term stability of that area. The other matter is that approximately 50% of the entire sulphur dioxide is being spewed out in the estuary. I believe Moneypoint is the main contributor to that. Mr. Reeves mentioned plans for Moneypoint. We keep on hearing that Moneypoint will have to close down in 2007 unless it cleans up its act. What is the story on that?

Mr. Reeves

There are various EU directives that set the amount of sulphur and nitrous oxide, or NOx, that one may spew into the atmosphere. There are national and local limits. The sulphur coming from coal is not a problem, since one can quite easily have treatment plants, and the targets that we have are not that onerous for Ireland, so we can deal with that. However, the very onerous targets are for NOx.

We and the ESB have managed to convince the Department of the Environment, Heritage and Local Government that we should examine NOx nationally rather than on a station-by-station basis. We must still install some hardware on the station to capture the NOx. The ESB will have to deal with its entire business across all its stations. If that investment goes ahead, one can continue running one's power station. However, if one decides not to do so, one may run it for 20,000 hours after 2008. If the ESB runs that station as at present, it will have to close down in 2011, but if it puts in that investment, it can continue. However, that investment will reduce the efficiency of the station so that one will get less power out at the cost of more input. It may cost approximately €260 million, and the ESB will not get any extra money from the price of electricity for that. The ESB must therefore take that decision by the middle of the year. That is part of the work that we are doing with the Department in advising the Minister on what he should do.

Does the CER have to approve it?

Mr. Reeves

Yes, as long as it approves the investment. I must approve whether it is merited by any return and whether we should let it go on to the price of electricity. For example, if that were a private company in the industry like Viridian and it had to make up its mind on that investment, it would be on the basis of what returns it could get in the market, and there would be no guarantee. More than likely, the ESB should approach it on the same basis. It is either good or bad for it, and if it is not good for it, it is not good for Ireland.

Is there any point in the State taking a huge dividend out of the company when this problem exists?

Mr. Reeves

The dividend policy is a shareholder policy. I have no say on it.

There is clearly funding to cover this.

Mr. Reeves

Yes. I would distinguish between being able to afford to do it and whether it is worthwhile doing so. Of course, the ESB could afford to do it, but it might not get its money back, and if that is so, it should put that €250 million into something else.

Even if it spends the €230 million it will not get the same output from the station. Therefore, it has to decide whether to close the station.

Mr. Reeves

Moneypoint is such a significant piece of kit on the Irish electricity system that it is not just a simple issue of the ESB making an investment. It is a national security supply issue in fuel diversity.

There was a reference to the amount of gas in the system. The whole thing has to be weighted in the national interest, not just in the ESB's interest. We are conducting a fuel diversity study. It is like spreading one's investments over a number of areas. We have coal, oil, gas, hydro and peat. Other countries do not have peat but they have nuclear. Some have interconnection. One can have all of those.

On the face of it, it appears that the Moneypoint station in some shape or form should continue and should not be closed down. The original climate change strategy published in 2000 was seen as the answer to everything - close down Moneypoint and replace it with gas and one has dealt with all the environmental issues. There is more to it because energy policy has to encompass environmental, competitive and security supply issues, all of which are tugging against each other. It is a matter for national governments to decide where we should fit in that mix.

Mr. Reeves mentioned earlier impediments to liberalisation of the whole electricity market and said he had sent a letter stating his concerns last December and received the Minister's response. Would it be possible to make both letters available to the clerk and the committee for distribution to the members?

Mr. Reeves

I could but I do not know what the Minister might think.

Perhaps Mr. Reeves would ask the Minister before sending them. Even if we were to get Mr. Reeves's letter it would give us reassurance. I have read the Competition Authority's response to what Mr. Reeves was doing with regard to the ESB and EirGrid and all the reservations it expressed in regard to what was happening.

We may at some stage call in the Competition Authority, even on this module, to ascertain its concerns. The original objective when the legislation was going through was to open up the marketplace and to remove impediments. If those impediments exist they should be removed.

Mr. Reeves

The market can be fixed internally but there may also be external issues. I would be keen to have an all-island market. In developing this new market we are in constant contact with our Northern colleagues as to how we might do that. If there was a full North-South market, these issues would diminish in importance but would not go away.

With the broadband module we went through it thoroughly with all involved and produced a report. In the energy module we are doing exactly the same. We may come back to Mr. Reeves again on this issue in the autumn. It would be a chance for us to revise what we heard from the others involved and to get his viewpoint at that stage. I thank Mr. Reeves and his officials for coming before the committee today.

Mr. Reeves

Thank you, Chairman. I am pleased to be here. As I said before, I am happy to interact and if the committee wants me to come in and discuss some of these issues I will be delighted to do so.

Our Chairman who has been ill sends his apologies. He will be here for our next meeting.

The joint committee adjourned at 5.15 p.m. until 2 p.m. on Tuesday, 20 April 2004.
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